The two most pressing challenges for many countries in the Middle East and North Africa are defeating the self-titled Islamic State (IS) militants and coping with the collapse in oil prices. These trends both emerged in summer 2014 and have run in parallel since then.
In our first In Focus, The arc of instability, we examine the threat militants pose to energy infrastructure across North Africa. The IS strategy of establishing local affiliates has had its greatest success in Libya, benefiting from the chaotic political and security situation. With international efforts to establish a unity government stalled, the militants are carrying out increasingly frequent attacks against oil fields and terminals in the Sirte Basin. This is pushing Libya’s already heavily disrupted oil output even lower, to just 0.3 mb/d at present, we estimate. Western powers are drifting inexorably towards a new military intervention, but without local allies on the ground and a political settlement, this is unlikely to end Libya’s woes.
It would be naïve to assume that as Libya descends into chaos, its neighbours are immune to the fallout from this worsening crisis, especially as low oil prices are drying up finances. This is particularly true for Algeria and Egypt, which have both struggled with militancy for years in the form of Al Qaeda in the Islamic Maghreb and various groups in the restive Sinai Peninsula. As we examine, the flow of fighters and weapons across borders is causing the threat posed by these groups to increase. If the recent attack on the In Salah gas facility in Algeria marks a shift towards targeting energy infrastructure, the consequences could be severe.
Indeed, oil and gas producers must also cope with far lower revenues. Even the Gulf States that amassed foreign reserves during the years of $100 oil have had to tighten their belts. As we discuss in our second In Focus, Only scratching the surface of reform, the members of the GCC have made a start by raising energy prices and cutting other subsidies. The impact on individual consumption is likely to be limited, as outright prices remain low, but the industrial sector may see a greater impact as larger cost increases eat into margins. While there has been less public opposition to this round of reforms, we do not believe the foundations have necessarily been laid for further subsidy reforms, particularly if oil prices continue to recover.
This brings us to another topic that has received much attention in recent months, the deal between various OPEC and non-OPEC nations to freeze production at January 2016 levels. The proposal emerged in February and gained substance when Saudi Arabia indicated it was open to such an agreement. There are increasing signs that the group of countries due to meet in Doha in mid-April will come to some form of agreement, even though Iran has refused to participate so far. Such a move will have little immediate impact on balances, but could lay the groundwork for more significant action later in the year.
Iran is unsurprisingly not ready to freeze production as it tries to ramp-up following sanctions relief in mid-January. While production and exports are rising, the pace is slower than Iranian officials had hoped due to a mix of remaining sanctions hurdles and difficulties securing deals with buyers. In turn, this may be giving comfort to other OPEC members that Iran’s return will not flood the market, in line with our long-held view.